MASTER 

NEGATIVE 
NO.  95-82503 


16 


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Author: 


Guaranty  Trust  Company 

of  New  York 

Title: 

Acceptances 


Place: 


[New  York] 


Date: 


[1918] 


MASTER   NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

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ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


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Guaranty  trust  company  of  New  York. 

Acceptances.    [New  York,  etc.]  Guaranty  trust  companv 
of  New  York  rl918i  * 


72  p.    \7i"". 


1.  Acceptances. 

Library  of  Congress 
Copyright    A  499626 


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HG165S.G8    1918 


18-13635 


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Acceptances 


SCHOOL  OF  BUSINESS 


T, 


1920 


Guaranty  Trust  Company 
of  New  York 


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School  of  Business 


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Acceptances 


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LIBRARY 
HOOL  OF  BUSINESS 


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Guaranty  Trust  Company 
of  New  York 


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140  Broadway 


FIFTH  AVENUE   OFFICE 
Fifth    Avenue    and   43rd    Street 

MADISON    AVENUE  OFFICE 
Madison  Avenue  and  60th  Street 


LONDON    OFFICE 
32     Lombard     St.,  E.    C. 

PARIS      OFFICE 
Rue    des  Italiens,   1   &  3 


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COPYRIGHT,    1918 


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Contents 


Foreword 


Trade  Acceptances 

Open  Account  and  Acceptance  Methods 
Compared 

General  Advantages  of  Trade  Acceptances 

Discount  Companies 

Bank  Acceptances 

Advantages  of  the  Bank  Acceptance 

Acceptances  under  the  Federal  Reserve  Act 

Acceptances  by  Member  Banks 

Eligibility 

Discount  by  Federal  Reserve  Bank 

Discount  of  Bankers'  Acceptances 


PAGB 


14 
19 

22 
24 
28 
34 
38 
48 
48 
54 


Purchase  of  Acceptances  by  Federal  Reserve 

Banks  59 

Acceptances  Under  the  Laws  of  New  York  64 

Market  for  Acceptances  69 


^.>  n/ 


v,^ 


Foreword* 

\  71  TIE  must  bear  in  mind  that  if  we  wish 
'^  ^  to  retain  a  prominent  place,  to  say 
nothing  of  supremacy,  in  the  world's  money 
market,  we  must  have  an  effective  organiza- 
tion for  the  creation  and  proper  distribution 
of  credit  instruments  when  the  war  is  over. 

We  must  not  forget  that,  notwithstanding 
the  non-adherence  of  the  banking  customs 
in  the  United  States  to  the  acceptance  prin- 
ciple, probably  75  per  cent,  of  the  world's 
foreign  commerce  is  financed,  at  some  time 
or  other,  by  means  of  either  bank  or  trade 
acceptances. 

We  have  the  largest  trade  figures,  and  it 
behooves  us,  not  only  for  our  own  trade  but 
for  the  sake  of  our  international  position,  to 
adopt  as  generally  as  possible  in  the  United 
States  a  system  of  credit  extension  that  has 
been  in  use  by,  and  of  value  to,  the  rest  of  the 
world. 

As  in  the  past  and  the  present,  we  shall 
undoubtedlv  in  the  future  have  a  heavv  trade 


^Extract  from  report  presented  by  Albert  Breton,  Chairman  of  the  Com> 
mittee  on  Trade  Acceptances  to  the  Convention  of  the  Reserve  City  Bankers 
Association,  New  York,  June  7, 1918. 


[4] 


¥ 


4  ■• 


balance  in  our  favor.  Besides  this,  all  the 
indications  are  that  the  hitherto  heavy  ad- 
verse invisible  trade  balance  will  to  a  large 
extent  disappear.  America  will  have  its  own 
merchant  marine  and  we  shall  pay  to  our- 
selves our  own  freights.  Our  marine  insur- 
ance companies  will  increase  and  develop, 
owing  to  the  necessities  that  have  been 
thrown  upon  them  by  the  war. 

There  has  been  a  large  absorption  in  the 
American  market  of  American  securities 
hitherto  held  abroad,  which  means  a  cessation 
of  interest  and  dividend  payments  to  for- 
eigners. Further,  there  have  been  heavy 
absorptions  of  foreign  bond  issues  in  this 
market,  which  after  the  war  will  be  a  source 
of  strength  in  our  international  position. 

In  short,  almost  every  one  of  the  items 
which  before  the  war  went  to  make  up  the 
offset  to  our  heavy  sales  of  merchandise  we 
shall  in  the  future  retain  ourselves. 

We  shall  undoubtedly  have  a  better  basis 
for  the  extension  of  foreign  credit  than  any 
other  country  in  the  world;  but  this  resource 
will  lie  in  our  hands  useless  and  without 

[5] 


iHi 


:1 


effect  unless  now,  while  we  have  the  oppor- 
tunity, we  teach  ourselves  how  to  use  it. 

With  respect  to  our  foreign  competitors  we 
must  remember  that  while  they  are  simply 
"marking  time,"  they  are  keeping  in  touch 
with  and  retaining  their  influence  in  those 
parts  of  the  world  that  have  heretofore  been 
their  customers  and  which  are  now  our 
customers. 

International  events  only  have  given  us 
this  opportunity— so  let  us  prepare  to  hold 
this  new  trade  against  the  resumption  of 
normal  conditions  and  the  opening  of  the 
rivalry  and  competition  that  are  most  likely 
to  ensue  at  that  time. 


June,  1918 


[6] 


.^ 


,/ 


M 


Acceptances 


There  are  two  kinds  of  acceptances — Trade 
Acceptances  and  Bank  Acceptances. 

Trade  Acceptances 

Use  in  Europe 

In  Great  Britain  and  in  many  countries  of 
Continental  Europe  practically  every  com- 
mercial transaction  is  financed  by  means  of 
a  time  draft,  or  bill  of  exchange.  The  draft 
is  drawn  by  the  seller  of  the  merchandise  and 
presented  to  the  buyer,  who,  if  he  finds  it 
satisfactory,  writes  across  its  face  the  word 
"Accepted,"  signs  his  name,  and  returns  the 
draft  to  the  seller.  It  then  becomes  a  trade 
acceptance — a  sound,  circulating  medium  of 
finance  which  commands  a  low  rate  of  interest 
and  which  the  seller,  if  he  desires,  may  dis- 
count at  his  bank. 

Although  European  countries  have  long 
realized  the  many  advantages  gained  by  the 
use  of  the  trade  acceptance  in  place  of  the 
open  book  account  in  financing  commercial 

[7] 


'''gijiji!!% 


\ 


^ 


li 


transactions,  merchants  in  America  have 
been  slow  to  grasp  and  utilize  the  oppor- 
tunities oflFered  by  the  acceptance  method. 

Not  an  Innovation  in  United  States 

The  use  of  the  trade  acceptance  in  this 
country  prior  to  the  Civil  War  was  more  or 
less  general,  but  after  that  conflict,  the  in- 
creasing financial  disorganization,  and  the 
risk  attending  the  grantmg  of  long  credits, 
created  a  demand  for  cash,  which  made  the 
cash  discount  system  so  popular  that  it  has 
since  continued  in  favor.  This  led  to  the 
open  book  account.  While  the  trade  accept- 
ance today  is  being  used  to  a  much  greater 
extent  than  a  few  years  ago,  goods  are  still 
bought  and  sold  largely  on  open  account. 

A  very  active  and  aggressive  propa- 
ganda is  being  made  throughout  the  prin- 
cipal commercial  centres  of  the  coimtry  in 
favor  of  trade  acceptances,  and  their  use  has 
considerably  increased.  Many  of  the  lead- 
mg  commercial  and  industrial  concerns  have 
adopted  this  new  system  of  credit  and  most 
banks  are  already  inclined  to  give  preference 
to  the  purchase  of  such  two  name  paper 

181 


*>    t'  fi 


. 


arising  from  actual  commercial  transactions 
between  the  drawer  and  the  acceptor. 

It  is  interesting  to  note  that  in  the  rates 
established  by  the  Federal  Reserve  Bank  of 
New  York,  domestic  trade  acceptances  with 
from  15  to  90  days  to  run  are  rediscounted 
at  43^  per  centum,  whereas  commercial 
paper  having  the  same  period  to  run  re- 
discounts at  4^  per  centum.  This  prefer- 
ential rate  in  favor  of  trade  acceptances  by 
all  Federal  Reserve  banks  shows  the  official 
endorsement  by  the  Federal  Reserve  Board 
of  the  trade  acceptance  system  of  credit. 

The  actual  open  market  rates  for  prime 
bankers'  eligible  bills  in  June,  1918,  ranged 
from  4i}i  per  centum  in  New  York  to  4^  per 
centum  in  other  cities,  whereas  commercial 
paper  was  quoted  at  6  per  centum. 

Trade  Acceptance  Defined 

A  trade  acceptance  is  a  time  draft  or  bill 
of  exchange,  drawn  by  the  seller  of  goods  on 
the  buyer  for  the  purchase  price,  and  ac- 
cepted by  the  buyer,  payable  on  a  certam 
date  at  a  place  designated  on  the  face  of  the 

[9] 


instrument.  A  trade  acceptance,  amounts  to 
a  negotiable  guarantee  by  the  purchaser  of 
goods  that  at  a  specified  time  and  place,  he 
will  pay  the  purchase  price.  In  other  words, 
a  trade  acceptance  evidences  a  transaction 
fully  completed,  and,  it  being  a  negotiable 
instrument,  the  seller,  by  means  of  it,  may 
reimburse  himself,  owing  to  the  fact  that 
acceptances  are  readily  salable. 

Distinguished  from  Sight  Draft  or 
Promissory  Note 

A  note  is  ordinarily  used  to  borrow  money 
or  to  settle  over-due  obligations.  A  trade 
acceptance  shows  on  its  face  that  it  is  drawn 
by  the  seller  on  the  purchaser  of  merchandise 
for  the  price  of  the  goods.  When  accepted, 
it  becomes  a  valid  promise  to  pay  on  a  speci- 
fied date,  a  negotiable  instrument  equally 
as  binding  upon  the  person  accepting  it 
as  his  promissory  note  would  be.  As  a 
trade  acceptance  is  an  obligation  of  the 
buyer  indorsed  by  the  seller,  the  bank  dis- 
counting it  is  secured  by  two  name  instead 
of  by  one  name  paper,  as  is  the  case  with  a 
promissory  note. 

[10] 


^*r^ 


a. 


Trade  and  bank  acceptances  are  instru' 
ments  of  credit  which  should  be  employed  in 
the  financing  of  business  and  industry — in 
the  moving  of  crops,  and  in  a  thousand  other 
ways.  In  this  time  of  war  we  should  make 
the  best  possible  use  of  these  instruments  of 
credit,  and,  as  a  patriotic  duty,  should  place 
first  of  all  the  Government's  needs  for  cash 
with  which  to  carry  on  the  war  until  we  win 
the  victory. 

Method  of  Using 

The  seller  desiring  to  use  the  acceptance 
method,  in  making  out  an  invoice  for  a  sale 
of  goods,  forwards  with  the  invoice,  a  time 
bill  or  draft  drawn  on  the  purchaser  for  the 
purchase  price,  payable  at  a  specified  date; 
or  where  the  buyer  makes  several  purchases 
of  small  amounts  during  the  month,  the  seller 
in  making  up  the  monthly  statement  for- 
wards with  it  a  draft  or  bill  made  out  for 
the  total  amount  due.  When  the  purchaser 
of  goods  receives  the  draft  or  bill  he  may  pay 
it  at  once,  having  deducted  whatever  is  al- 
lowed as  a  discount  for  prompt  payment  in 

[11] 


I 

i 


Si 


M'*^ 


[12] 


cash,  or  he  may  write  across  the  face  thereof 
the  date  and  the  words,  for  example,  "Ac- 
cepted— payable  at  Guaranty  Trust  Com- 
pany of  New  York/'  The  buyer  then  signs 
his  name  and  returns  the  instrument  to  the 
seller.  The  latter  either  keeps  it  until  a  few 
days  before  it  matures,  when  he  sends  it  to 
his  bank,  which  makes  collection  from  the 
bank  at  which  the  instrument  is  payable,  or 
if  he  desires  funds,  discounts  it  at  his  bank 
or  sells  it  in  the  open  market  through  an 
acceptance  dealer. 

The  place  of  payment  is  at  the  oflBce  of  the 
buyer  of  the  goods,  namely,  the  acceptor,  if 
no  other  place  is  so  designated.  To  facilitate 
the  collection  of  acceptances,  the  paper 
should  be  made  payable  at  the  acceptor's 
bank,  and  the  banker  and  acceptor  should 
make  arrangements  so  that  maturing  accept- 
ances are  charged  to  the  acceptor's  account 
on  the  date  of  maturity. 

When  Not  to  be  Used 

In  countries  abroad  where  bills  of  exchange 
and  acceptances  have  reached  their  highest 
development  as  credit  instruments  and  cir- 

[13] 


ciJatiiig  mediums,  it  has  been  the  custom 
that  they  shall  be  issued  for  commercial 
purposes  or  against  actual  business  trans- 
actions. They  should  represent  current  mer- 
chandise transactions  connected  with  the 
purchase  and  sale  of  goods,  and  should  never 
be  given  for  overdue  accounts  or  borrowed 
money.  The  custom  in  this  country  follows 
the  rulings  of  the  Federal  Reserve  Board 
respecting  eligibility  for  discount  and  purchase 
by  Federal  Reserve  banks. 

Open  Account  and  Acceptance 
Methods  Compared 

Open  Account  Ties  up  Capital 

The  open  account  system  with  its  indefinite 
time  of  payment,  is  a  business  habit  with 
many  disadvantages.  One  defect  is  that 
it  forces  the  seller  to  carry  the  financial 
burden  of  the  buyer.  The  open  account 
ties  up  the  seller's  invested  or  borrowed 
capital  for  an  indefinite  period,  during  which 
he  receives  no  stated  compensation  for  it. 

The  trade  acceptance  does  not  lessen  the 
advantage   of   the   buyer.    He  obtains   his 

[14] 


4v 


credit  for  a  definite  instead  of  an  indefinite 
period  of  time.  It  is  of  service  to  the  seller, 
for  he  can  take  the  acceptance  to  his  bank, 
discount  it  at  a  lower  rate  than  is  accorded 
to  any  other  commercial  paper,  and  have 
the  use  of  the  money.  The  bank — ^not  the 
seller — carries  the  credit,  and  all  parties  to 
the  transaction  are  placed  on  an  equitable 
basis. 

Trade  acceptances  are  not  meant  to  defer 
payment  in  ordinary  transactions  where  the 
buyer  usually  pays  cash  on  the  spot  or  within 
ten  days.  They  are  not  needed  when  busi- 
ness is  done  on  that  basis,  and  the  buyer 
is  not  forced  to  use  acceptances  if  he  prefers 
paying  cash  and  saving  the  discount  allowed 
for  cash  payments. 

Uncertainty  of  Open  Accounts 

As  assets,  open  accounts  are  neither  quick 
nor  sure.  They  are  frequently  slow  and  un- 
certain of  realization.  Even  the  best  of  them 
are  seldom  marketable  for  more  than  fifty 
per  centum  of  their  face  value.  In  the  form 
of  eligible  trade  acceptances,  accounts  can 

[15] 


i 


be  converted  in  full  into  cash  at  a  better 
rate  of  interest  than  is  commanded  by  promis- 
sory notes. 

Unreasonable  Extensions  of  Time 

A  disadvantage  of  the  open  account  system 
is  the  ease  with  which  payment  can  be  post- 
poned, thus  enabling  purchasers  to  abuse 
their  credit  by  putting  off  the  settlement  of 
their  obligations  for  long  periods  of  time 
without  even  paying  interest.  This  results 
from  the  fact  that  since  the  time  of  payment 
is  usually  not  fixed,  the  privilege  of  obtaining 
an  extension  is  regarded  as  a  matter  of 
course. 

Difficulties  in  Event  of  Suit 

If  it  becomes  necessary  to  sue  on  an  open 
account,  in  order  to  collect,  the  correctness 
of  the  book  entries  must  first  be  proved. 
The  buyer  thereupon  may  raise  objections 
which  may  cause  much  delay.  The  trade 
acceptance  is  an  acknowledgment  of  the 
receipt  of  the  goods  and  of  a  proper  invoice, 
and  is  proof  of  the  validity  of  the  debt, 
since  the  debtor  has  already  admitted  the 

[16] 


*.. 


existence  of  a  valid  contract  by  his  accept- 
ance of  the  terms  of  the  bill. 

When  an  innocent  third  party  becomes  a 
bona  fide  holder  of  the  paper,  payment  can- 
not be  avoided  by  seeking  refuge  in  the  usual 
technical  defenses,  since  only  the  signature 
of  the  acceptor  needs  to  be  proved  and  no 
off-sets  or  counter-claims  of  any  sort  can  be 
urged. 

Costliness  of  Open  Account  System 

The  open  account  is  costly.  The  expense 
involved  in  collecting  slow  accounts,  in  ex- 
tensions of  the  time  of  payment,  and  in  trade 
discounts — all  characteristic  of  the  open  ac- 
count system — constitutes,  in  the  aggregate, 
a  heavy  tax  on  business.  All  these  disad- 
vantages are  eliminated  by  the  use  of  the 
trade  acceptance  which  gives  stability  to 
commercial  credit  and  transforms  deferred 
obligations  into  definite  assets  and  liabilities. 

Conveniences  of  Open  Account  Retained 

The  right  to  make  partial  payments,  which 
is  one  of  the  conveniences  of  the  open  ac- 

[17] 


count,  may  be  arranged  with  the  bank;  and 
if  the  trade  acceptance  cannot  be  conven- 
iently met  by  the  customer  upon  its  maturity, 
the  merchant,  if  he  desires  to  help  him,  may 
do  so  by  taking  the  customer's  promissory 
note  with  interest.  Thus  the  merchant 
granting  the  extension  does  so  without  the 
loss  of  interest,  which  results  under  the  open 
account  system.  Since  trade  acceptances  are 
not  given  for  renewals  or  for  old  accounts, 
they  should  be  settled  with  notes  which  draw 
interest. 

Other  Disadvantages  Eliminated 

Among  other  disadvantages  of  the  open 
account  method  which  will  be  eliminated  by 
the  general  adoption  of  the  trade  acceptance 
may  be  mentioned  the  habit  of  over-buying 
and  over-selling,  the  returning  of  goods  and 
cancellation  of  orders  for  trivial  reasons,  the 
taking  of  unwarranted  discounts,  the  secret 
assignments  of  accounts  and  losses  from  un- 
collectible debts. 


♦ 


[18] 


General  Advantages  of  Trade 
Acceptances 

Business  Conditions  Improved 

The  trade  acceptance  releases  funds  tied 
up  in  outstanding  accounts,  and  invested 
capital  acquires  more  liquidity  under  a  system 
which  offers  negotiable  paper  in  place  of  non- 
negotiable  open  book  accounts.  Relations 
between  buyer  and  seller  are  vastly  improved 
by  paper  which  clearly  defines  their  respective 
rights  and  obligations,  and  extravagance  is 
checked  by  the  constant  reminder  to  the 
debtor  that  his  credit  is  apt  to  be  tested  at 
any  time. 

Advantages  to  the  Buyer 

The  buyer  derives  certain  advantages  from 
the  use  of  the  trade  acceptance.  It  develops 
in  him  the  habit  of  careful  buying,  enables 
him  to  judge  how  he  stands  financially  and 
what  he  can  do  with  his  capital,  and  it 
strengthens  his  credit.  He  is  able  definitely  to 
fix  the  dates  of  his  payments,  thus  develop- 
ing a  habit  of  promptness  in  fulfilling  obli- 
gations. 

[19] 


The  small  buyer  is  better  able  to  compete 
with  larger  firms  since  the  trade  acceptance 
gives  him  a  better  credit  rating  and  places 
his  business  on  a  definite  financial  basis, 
which  cannot  be  the  case  when  his  debts 
are  in  the  form  of  open  accounts  with  no 
means  of  ascertaining  when  they  will  be 
liquidated. 

Advantages  to  the  Seller 

Sellers  or  manufacturers  with  limited  capi- 
tal, by  the  adoption  of  the  trade  acceptance 
method,  avoid  the  necessity  of  heavy  borrow- 
ing, and  the  tying  up  of  their  capital  and 
borrowed  money  in  open  accounts,  and  as 
their  operating  expenses  are  reduced,  their 
profits  are  accordingly  increased.  Moreover, 
the  merchant  can  estimate  with  a  consider- 
able degree  of  certainty,  what  his  income 
will  be  from  month  to  month,  for  with 
its  fixed  date  of  maturity,  payment  of  a 
trade  acceptance  can  usually  be  counted 
upon.  Merchants  receiving  trade  accept- 
ances may  discount  them  at  a  bank  for  ap- 
proximately one  hundred  per  centum  of  their 
face  value. 

[80] 


<* 


4] 


The  practical  eflfect  of  the  ordinary  book 
account  is  to  burden  the  seller  with  the 
financing  of  the  customer's  business.  This 
not  only  ties  up  the  capital  of  the  seller, 
thus  narrowing  the  scope  of  his  business,  but 
also  weakens  his  financial  statement  because 
of  the  character  of  his  accounts.  By  de- 
manding trade  acceptances,  the  seller  is  able 
to  overcome  these  diflSculties,  since  eligible 
acceptances  are  considered  an  excellent  in- 
vestment for  banks,  and  may  be  readily 
negotiated. 

Advantages  to  the  Banker 

From  the  standpoint  of  a  banker,  the  trade 
acceptance  is  a  very  advisable  form  of  invest- 
ment, since  it  represents  sales  actually  made 
and  oflFers  paper  secured  by  two  names  in- 
stead of  by  one,  as  in  the  case  of  a  promissory 
note.  The  trade  acceptance  oflFers  security 
upon  which  the  banker  can  easily  borrow 
by  reason  of  the  fact  that  eligible  trade 
acceptances  may  be  rediscounted  at  any 
Federal  Reserve  bank  at  lower  rates  of 
interest  than  any  other  commercial  paper. 

[21] 


Under  this  system,  banks  finance  the  sales 
of  goods,  whereas  under  the  old  system,  the 
manufacturer  or  seller  was  forced  to  do  this. 

The  bank  also  is  enabled,  through  the 
general  use  of  trade  acceptances,  to  ascertain 
more  readily  the  credit  of  its  customers  as 
well  as  their  business  methods. 

Discount  Companies 

The  report  of  the  Committee  on  Trade 
Acceptances  to  the  1918  Convention  of  the 
Reserve  City  Bankers'  Association,  says,  in 
part : 

"Immediately  after  the  development  of  the  accept- 
ance principle  in  banks  there  appeared  in  New  York 
City,  a  number  of  bill  brokerage  houses.  Prom  their 
small  beginnings,  these  houses  have  extended  their 
business  and  clientele  farther  and  farther  into  the 
coimtry, 

"New  York  bankers  have  done  their  best  to  facilitate 
their  operations,  and,  on  their  own  part,  the  bill  brokers 
have  proved  to  be  a  source  of  welcome  assistance  to 
those  bankers  who  are  desirous  of  developing  a  discount 
market. 

"Quite  lately  there  have  appeared  the  pioneer  Ameri- 
can  discount  companies.    One  has  been  organized  and 

[  22  ] 


is  operating  in  New  York,  and  another  one  will  open 
for  business  shortly  under  the  auspices  of  ten  leading 
banking  concerns  in  New  York  with  a  capital  of  $5,000,- 
000  and  a  surplus  of  $1,000,000. 

"There  has  been  developed  in  Boston  under  first- 
dass  auspices  a  discount  company  whose  avowed  field 
will  be  New  England.  The  interests  that  have  fathered 
these  discount  companies  are  thoroughly  conversant 
with  their  primary  function  which  is  to  act  as  a  reservoir 
to  take  up  a  temporary  glut  of  bills  into  the  market, 
and  subsequently,  as  the  demand  appears,  to  let  them 
out  as  the  need  may  be,  thus  eliminating  the  situation 
existing  heretofore  in  which  there  have  been  from  time 
to  time  offerings  of  bills  without  a  spontaneous  demand, 
and  vice  versa. 

"The  advent  of  such  enterprises  has  been  welcomed, 
and  it  is  to  be  hoped  that  each  important  city  of  the 
country  will  organize  a  local  discount  company.  They 
have  a  fertile  field,  and  the  consequent  augmenting 
use  of  acceptances  will  soon  put  them  on  a  lucrative 
basis. 

"It  is  gratifying  to  all  of  us  who  are  interested  in 
the  propagation  of  the  acceptance  principle  to  realize 
that  most  of  the  responsible  means  of  creating  senti- 
ment, banking  and  trade  policy  are  with  us.  Nobody 
realizes  more  than  the  banker  how  much  prejudice  and 
inertia  must  be  overcome.'* 


[23] 


Bank  Acceptances 

Trade  and  Bankers^ 
Acceptances  Distinguished 

Some  confusion  has  arisen  as  to  the  differ- 
ence between  trade  acceptances  and  bankers' 
acceptances.  The  former  is  the  result  of  a 
transaction  between  the  buyer  and  seller;  the 
latter  the  result  of  the  granting  of  credit 
by  a  banker.  In  the  former  case,  it  is  the 
buyer  who  accepts  the  draft;  in  the  latter  it 
is  the  bank. 

Definition 

A  banker's  acceptance  is  defined  by  the 
Federal  Reserve  Board  as  "a  bill  of  exchange 
of  which  the  acceptor  is  a  bank  or  trust  com- 
pany, or  a  firm,  person,  company  or  corpo- 
ration engaged  in  the  business  of  granting 
bankers'  acceptance  credits." 

How  Acceptance  Credit  is  Extended 

In  other  words,  a  bank  acceptance  consists 
of  the  extension  of  the  bank's  credit  to  a 
customer,  wherein  the  bank,  for  a  considera- 

[24] 


il\^ 


tion,  permits  the  customer  to  use  the  bank's 
credit.  This  credit  may  be  either  secured 
or  unsecured,  depending  upon  the  business, 
character,  and  financial  responsibihty  of  the 
applicant. 

Distinction  Between  a  Bank's 
Acceptance  and  its  Note 

According  to  an  opinion  of  the  counsel  of 
the  Federal  Reserve  Board,  when  a  member 
bank  of  the  Federal  Reserve  System  accepts 
a  draft  or  bill  of  exchange  drawn  against  it, 
it  enters  into  a  contract  substantially  similar 
to  that  of  the  maker  of  a  note,  so  that  while 
the  form  of  the  instrument  differs,  the  legal 
eflfect  is  the  same.     The  use  of  a  bank's 
acceptance,  however,  diflfers  from  the  use  of 
its  promissory  note.    When  a  bank  accepts 
a  draft  or  bill  of  exchange  for  one  of  its  cus- 
tomers, it  merely  lends  its  credit  responsi- 
bihty  to  its  customer  in  order  that  he  may 
procure  the  funds  elsewhere.     The  holder  of 
a  bank's  acceptance  has  the  same  legal  rights 
against    the    bank    as    the    holder    of    its 
promissory  note. 

[25] 


Method  of  Using 

A   bank   acceptance  may   be  created   as 
follows : 

Richard  Brown,  in  New  York,  buys  of 
John  Doe,  in  Galveston,  a  quantity  of  mer- 
chandise.    In  order  to  reimburse  John  Doe 
in  a  convenient  manner.  Brown  arranges  with 
his  bank  in  New  York  to  accept,  on  presenta- 
tion, the  drafts  of  John  Doe  with  documents 
attached.    Doe  thereupon,  under  the  terms 
of  the  sale,  draws  on  the  bank,  which  accepts 
the  drafts,  taking  possession  of  the  docu- 
ments.    The  drafts  drawn  by  Doe  on  the 
bank  after  they  have  been  accepted  become 
bank   acceptances.     Then    ensues    a    credit 
operation   between    the  bank   and   Richard 
Brown  to  determine  what  disposition  is  to 
be  made  of  the  documents  and  upon  what 
terms  the  bank  will  surrender  them.    This 
adjustment  is  easily  made.     The  bank  hav- 
ing agreed  to  pay  the  acceptances  when  they 
fall  due.  Brown  undertakes  to  provide  the 
bank  with  funds  for  that  purpose  prior  to 
the  maturity  of  the  acceptance.     (It  must 
be  borne  in  mind  that  the  bank  is  primarily 

[26] 


•OiO 


p  iuaaidi^sVpjjsatuop 
30p  ?ujclctiq]Mq'  pdiued 


•-Si 


\\ 


[27] 


• 


liable  upon  its  acceptance,  and  that  the 
security  for  its  acceptance  is  the  merchandise, 
which  is  the  basis  for  the  transaction.  The 
bank  also  has  the  guarantee  of  the  purchaser 
of  the  merchandise.) 

Commercial  Credit  Bills 

The  foregoing  case  describes  a  documentary 
bill.  Another  form  of  acceptance  is  created 
when  the  customer  draws  his  own  draft 
directly  on  the  bank,  and  the  bank  accepts 
it  for  payment  at  a  future  time.  Such  an 
acceptance  would  be  called  a  commercial 
credit  bill  and  might  be  secured  by  warehouse 
receipts  or  other  collateral,  or  simply  by  the 
general  credit  of  the  customer. 

AdvanUges  of  the  Bank  Acceptance 

Bank  acceptances  offer  certain  distinct 
advantages,  not  only  to  merchants  but  also 
to  the  banks  through  which  they  deal.  The 
specific  advantages  may  be  summarized  as 
follows : 

The  use  of  acceptances  makes  it  possible 

[28] 


■ 


for  trust  companies  and  banks  to  finance 
legitunate  business  transactions  of  their  cus- 
tomers properly  and  conveniently. 

Banks  having  surplus  money  which  cannot 
readily  be  employed  at  the  time  can  invest 
It  m  prune  acceptances  which  can  either  be 
held  until  maturity  or  sold  in  the  open 
market,  should  such  action  be  necessary. 

Because  of  their  ready  marketability,  ac- 
ceptances of  well-known  institutions  will  be 
sought  more  and  more  as  short-term  invest- 
ments and  will  be  especially  valuable  as  such. 

Advantages  in  Foreign  Trade 

At  this  time,  when  plans  for  fostering  and 
buildmg  up  our  foreign  trade  are  being  for- 
mulated,  the  advantages  of  the  adoption  of 
the  acceptance  in  foreign  transactions  is  of 
especial  importance. 

Exporters  who  have  desired  to  enter  into 
foreign  trade  have  experienced  much  diffi- 
culty  in  their  inability  to  grant  as  good  terms 
of  credit  as  have  been  accorded  foreign  buyers 
by  competitors  abroad.  It  has  been  the 
practice  of  many  American  exporters  to  re- 

[29] 


•^zjr 


quire  payment  in  cash  at  New  York  against 
documents,  and  the  foreign  trade  of  this 
country  has  thus  been  handicapped.  This 
difficulty  may  be  overcome  by  the  use  of  bank 
acceptances,  as  the  credit  which  is  required 
for  the  goods  may  be  established  by  drawing 
at  sixty  or  ninety  days'  sight  on  a  New  York 
accepting  bank  or  trust  company,  the  accept- 
ance being  discounted  at  an  agreed  fixed  rate. 

Another  advantage  to  the  exporter  is  that 
he  is  immediately  reimbursed  for  the  value 
of  his  products  or  merchandise  and,  instead 
of  having  his  capital  tied  up  in  credits,  it  is 
released  for  re-employment  in  new  business. 

Acceptances,  based  principally  on  the 
commodities  exported  from  this  country, 
form  a  valuable  security.  This  was  particu- 
larly evidenced  in  London  at  the  outbreak 
of  the  war,  when  acceptances  amounting  to 
more  than  £500,000,000  were  in  circulation. 
The  greater  part  of  these  were  subsequently 
liquidated  by  the  "self -liquidating''  process; 
that  is,  by  the  sale  of  the  commodity  which 
formed  the  basis  of  the  transaction,  thus 
proving  the  soundness  of  the  accepting  busi- 
ness, in  general. 

[30] 


i 


' 


> 


High  Class  of  Security 

The  standing  and  credit  of  the  accepting 
bank  make  the  paper  it  accepts  a  security  of 
the  highest  class.  The  bank  acceptance  at 
once  eliminates  the  necessity  and  trouble  of 
closely  investigating  the  drawer  or  the  en- 
dorsers, as  the  primary  responsibihty  rests 
with  the  accepting  bank.  If  its  credit  is 
good,  all  other  names  on  the  paper  may  be 
of  secondary  importance. 

Field  of  Buyer  Broadened 

Bank  acceptances  enhance  the  credit  and 
broaden  the  buymg  field  of  the  merchant. 
By  means  of  a  letter  of  credit  from  his  bank 
to  the  affect  that,  under  certain  conditions 
and  up  to  a  certain  agieed  figure,  it  will  ac- 
cept all  bills  drawn  for  his  account,  the 
merchant  is  able  to  make  his  purchases  ad- 
vantageously, even  in  markets  where  he  is 
unknown. 

Bank  Acceptances  Quick  Assets 

"No  opposition  seems  to  exist  today  against  bank 
acceptances  on  the  part  of  the  American  banks,  but 

[31] 


many  of  them  are  still  somewhat  hesitating  to  execute 
such  an  obligation  or  to  have  their  name  oflfered  in  the 
open  discount  market,"  says  the  report  of  the  Com- 
mittee on  Acceptances  to  the  1918  Convention  of  the 
Reserve  City  Bankers'  Association. 

"Strange  to  say  many  of  these  latter  institutions  are, 
however,  good  buyers  of  other  banks'  acceptances, 
realizing  the  advisability  of  carrying  an  extra  reserve 
in  such  quick  or  convertible  assets. 

"It  is  the  opinion  of  the  Committee  that  every 
member  of  this  association  should  return  to  his  home 
town  and  his  bank  with  the  purpose  of  developing 
this  idea  not  only  in  his  own  bank,  but  among  his 
neighbors;  to  lose  no  opportunity  to  assist  in  the  dis- 
tribution and  redistribution  of  his  and  his  neighbor's 
acceptances;  to  give  all  proper  preference  that  he  con- 
sistently may  to  encourage  the  development  of  this 
form  of  operation  in  banks." 

Broadening  Market  for  Acceptances 

The  Fourth  Annual  Report  of  the  Federal 
Reserve  Board  says: 

"This  year  (1917)  has  witnessed  a  continued  increase 
in  the  volume  of  bankers'  acceptances  created,  and  a 
steadily  broadening  open  market  in  which  they  circu- 
late. At  the  dose  of  the  year  1916  it  was  stated  that 
there  were  outstandmg  about  $250,000,000  of  dollar 
acceptances,  including  bills  of  foreign  origin,  on  Ameri- 

[32] 


' 


> 


A 


can  merchants.  It  is  probable  that  the  volume  of  such 
paper  in  the  United  States  at  the  close  of  1917  is  from 
four  to  five  hundred  million  dollars. 

"The  increases,  while  general  in  all  classes  of  bills 
eligible  for  discount  with  Federal  Beserve  banks,  are 
most  notable  in  the  bills  arising  from  domestic  trans- 
actions  and  from  the  increasing  trade  between  the 
United  States  and  the  Orient. 

"The  more  general  recourse  during  the  year  to 
bankers'  credits  for  financing  the  large  seasonal  move- 
ments in  commodities  is  an  indication  of  a  wider 
understanding  and  appreciation  by  the  borrower  and 
banker  alike  of  the  advantages  of  this  form  of  financing 
transaxitions  that  in  themselves  furnish  the  means  of 
discharging  the  obligations  incurred  by  the  taker  of 
credit  and  the  acceptor. 

"With  the  increased  volume  of  business,  the  number 
of  accepting  banks  and  purchasers  of  bills  also  has 
steadily  increased.  The  names  of  many  well-known 
institutions  located  in  the  larger  cities  of  the  country 
have  now  become  known  as  acceptors  through  their 
acceptances  oflFered  in  the  open  market  in  New  York. 
Also  dealers  report  an  increasing  interest  on  the  part 
of  out-of-town  banks  as  investors  in  prime  bills  evi- 
denced  both  in  the  number  of  new  buyers  and  the 
volume  of  their  purchases." 


[33] 


Acceptances  Under  the  Federal 

Reserve  Act* 

The  Federal  Reserve  Board  has  unquali- 
fiedly designated  the  trade  acceptance  as  a 
favored  form  of  commercial  paper  and  gives 
preference  in  rates  of  discount  to  such  accept- 
ances when  they  conform  to  the  require- 
ments of  the  Federal  Reserve  Act  and  of  the 
regulations  of  the  Federal  Reserve  Board. 
In  order,  therefore,  that  much  of  the  mis- 
understanding and  uncertainty  which  has 
tended  to  discredit  the  merit  and  use  of  such 
paper  may  be  avoided,  the  trade  acceptance 
should  comply  with  the  rules  and  regula- 
tions of  the  Federal  Reserve  Board. 

Defined  by  Federal  Reserve  Board 

The  Federal  Reserve  Board  has  defined 
the  trade  acceptance  as  "a  bill  of  exchange 
drawn  by  the  seller  on  the  purchaser  of 
goods  sold,  and  accepted  by  such  purchaser." 
The  word  "goods"  as  here  used,  means  goods. 


*SutemenU  contained  under  this  heading  are  hased  on  the  Federal 
Reserve  Act,  Regulations  of  the  Federal  Reserve  Board,  and  opinions  of 
Counsel  of  the  I^eral  Reserve  Board. 


[34] 


i 


-> 


wares,  merchandise,  and  all  agricultural  prod- 
ucts, including  live  stock. 

A  bill  of  exchange  is  defined  by  the  Federal 
Reserve  Board  as  "an  unconditional  order  in 
writing,  addressed  by  one  person  to  another, 
other  than  a  banker,  signed  by  the  person 
giving  it,  requiring  the  person  to  whom  it  is 
addressed,  to  pay,  in  the  United  States,  at  a 
fixed  or  determinable  future  time,  a  sum 
certain  in  dollars  to  the  order  of  a  specified 
person." 

Qualifications  Essential 
to  Negotiability 

To  be  negotiable,  a  bill  of  exchange  must 
be  an  unconditional  order  to  pay  on  demand, 
or  at  a  fixed  or  determinable  future  time,  a 
certain  sum  of  money  to  order  or  to  bearer, 
and  if  payment  is  made  dependent  upon  a 
condition  or  contingency,  the  bill  becomes 
conditional  and  non-negotiable. 

A  general  acceptance  of  a  conditional  bill 
does  not  make  it  negotiable  and  a  conditional 
acceptance  of  an  unconditional  bill  destroys 
its  negotiability,  because  the  acceptance  is 

[35] 


i!  Iiir 


1:111 


thereby  made  a  conditional  one.  A  qualified 
or  conditional  acceptance  of  a  bill  of  exchange 
releases  the  drawer  and  prior  indorsers.  A 
bill  drawn  payable  "at  sight"  and  accepted 
payable  in  three  months,  has  been  held  to  be 
a  conditional  acceptance.  Likewise,  an  ac- 
ceptance to  pay  at  a  designated  place  different 
from  the  residence  of  the  acceptor,  when  the 
bill  stipulates  that  it  is  to  be  paid  there  and 
not  elsewhere,  qualifies  the  terms  of  the  bill 
and  renders  the  acceptance  conditional. 

Reference  to  Particular 
Consignment 

If  payment  is  confined  to  the  proceeds  of 
a  particular  fund,  and  is  not  chargeable  to 
the  general  credit  of  the  drawer,  the  bill  is 
conditional  and  non-negotiable. 

Whether  reference  to  a  particular  consign- 
ment of  goods  renders  the  bill  conditional  has 
been  a  source  of  conflict  in  the  courts,  some 
holding  that  it  is  a  mere  indication  of  a  fund 
out  of  which  the  drawer  is  to  reimburse  him- 
self, others  holding  that  the  bill  is  thereby 
made  conditional  because  limiting  payment 

18«1 


A 
\ 


k 


f 


to  proceeds  of  the  particular  shipment  men- 
tioned. A  reference,  however,  in  general 
terms  on  the  face  of  the  accepted  bill  to 
the  fact  that  it  is  based  on  exportation  or 
importation  of  goods  does  not  make  it  con- 
ditional and  impair  its  negotiability.  Such 
acceptance,  would,  therefore,  not  be  ineligible 
for  rediscount  under  the  Federal  Reserve  Act. 
Bills  made  payable  "in  exchange"  are  not 
payable  "in  money,"  and  are  therefore  not 
negotiable.  A  provision  in  a  bill  that  it  is 
payable  with  interest  at  a  designated  rate 
per  annum  after  maturity  if  payment  is 
delayed,  does  not  impair  the  instrument's 
negotiability.  Likewise  by  waiving  demand, 
notice,  and  protest  or  waiving  homestead 
exemption  rights,  the  negotiability  of  the  bill 
is  not  affected. 


1 

r 


Place  of  Payment 

The  drawer  may  make  the  draft  payable 
at  the  bank  against  which  it  is  drawn  or  at 
another  place,  and  when  accepted,  it  will  be 
payable  according  to  its  terms,  namely,  at  the 
bank  of  the  drawee  or  other  designated  place. 
If  payable  at  the  drawee's  bank,  the  latter 

IS7] 


•:•  111 


*  it  navable  elsewhere,  as  at  the 
may  accept  it  pay  aWe  ^^^^^_ 

Federal  Reserve  bank,pr(mci 
ance  does  not  stipulate  that  it  is  pay 
only  at  the  Federal  Reserve  bank. 
Discharge  of  Draper  and  Iruiorsers 

The  acceptor  is  the  principal  debtor  af^r 
!      /  Notice  of  demand  and  protest 

"TbTS;en Tp-ties  secondarily  liable  in 
must  be  given  to  p  ^^^^^ 

*^  ^^:nlfand^^^^^^^  by  drawer  and 

X::  ^be  laiver  hav^g  no  effect  on 

the  acceptor  or  P;;^- jf^^f  ^^^^^  i,,txunient 

The  drawer  and  indorsers  oi  a 
made  payable  at  the  time  specified  m  the  biu 
^  not  released  by  failure  to  present  ^r 
;     „o  ,mless  the  bill  expressly  provides 
that  It  °^^t  '>e  P  ^^^^^^^^  ^^„ 

or  unless  it  is  maae  pay       ,^,:aence  of  the 
at  the  place  of  business  or  residence 

drawee. 

Acceptances  by  Member  Banks 

•  •  ^o  r^f  the  Federal  Re- 

:S;t  tofts  which,  excludmg  days  of  gn^. 

1881 


have  not  more  than  six  months'  sight  to  run 
if  one  of  the  following  conditions  is  present. 
The  bill  must 

1.  Have  origin  in  a  transaction  involving  the  importa- 
tion or  exportation  of  goods,  or 

i.  Arise  from  a  transaction  involving  domestic  ship- 
ment of  goods  and  have  shipping  documents  at- 
tached at  the  time  of  acceptance  seeming  or  convey- 
ing title  to  the  goods,  or 

8.  Be  secured  at  the  time  of  acceptance  by  warehouse, 
receipt  or  other  such  document  conveying  or  secur- 
ing title  to  readily  marketable  staples. 

Bills  of  the  classes  above  designated  may 
be  accepted  by  member  banks  up  to  fifty 
per  centum  of  their  capital  and  surplus,  or 
where  permission  is  obtained  from  the  Federal 
Reserve  Board,  up  to  one  hundred  per 
centum.  However,  acceptances  arising  from 
domestic  transactions  may  not  exceed  fifty 
per  centum  of  the  capital  and  surplus  of  the 
bank,  which  is  prohibited  also  from  accepting 
for  any  one  person,  firm,  company  or  corpo- 
ration, drafts  aggregating  more  than  ten 
per  centum  of  the  capital  and  surplus  of  the 
member  bank.  The  latter  limitation  has  no 
application  where  the  draft  accepted  carries 

[39] 


the  attached  documents  above  referred  to, 
or  other  actual  security  arising  from  the 
transaction  covered  by  the  acceptance. 

Bills  drawn  on  member  banks  by  banks 
and  bankers  in  foreign  countries  to  furnish 
dollar  exchange,  where  the  usages  of  trade 
make  it  necessary,  may  be  accepted  by  the 
former  to  an  amount  not  in  excess  of  fifty 
per  centum  of  their  capital  and  surplus, 
provided  such  drafts  have  not  more  than 
three  months'  sight  to  run. 

Applications  to  Federal  Reserve  Bank 

The  Federal  Reserve  Board  has  provided 
that  any  member  bank  with  an  unimpaired 
surplus  equalling  at  least  twenty  per  centum 
of  its  paid-up  capital,  desiring  to  accept  up 
to  one  hundred  per  centum  of  its  paid-up 
and  unimpaired  capital  stock  and  surplus, 
as  above  described,  shall  file  an  application 
with  the  Board  through  the  Federal  Reserve 
bank  of  its  district.  The  Federal  Reserve 
bank  then  reports  the  financial  status  of 
the  applying  bank  to  the  Board  and  states 
whether  the  general  financial  conditions  in  the 
district  are  such  as  to  make  the  granting  of  the 

[40] 


' 

<) 


application  advisable,  whereupon  the  applica- 
tion is  approved  or  rejected.  Any  approved 
application  may  be  rescinded  by  giving 
ninety  days'  notice  to  the  member  bank. 

Limitations  as  to  Amount 

The  fifty  per  centum  limitation  on  drafts 
accepted  for  the  purpose  of  furnishing  dollar 
exchange  is  entirely  separate  from  and  not 
included  in  the  limits  placed  by  the  Act 
upon  the  acceptance  by  a  member  bank  of 
drafts  and  bills  of  exchange  drawn  against 
the  shipment  of  goods  or  against  warehouse 
receipts  covering  readily  marketable  staples. 

Member  banks  purchasing  their  own  ac- 
ceptances before  maturity  need  not  include 
them  in  the  aggregate  of  acceptances  author- 
ized by  the  Federal  Reserve  Act. 

Maturity  to  Approximate 
Duration  of  Shipment 

Although  the  Act  fixes  a  maximum  matur- 
ity of  six  months,  yet  in  cases  where  a  draft 
is  drawn  against  a  shipment  of  goods  in  a 
transaction  not  involving  the  sale,  the  matur- 

[41] 


i 


ity  of  the  draft  should  approximate  the  dura- 
tion of  the  transit  of  the  goods,  the  law  con- 
templating that  the  acceptance  should  be 
to  finance  the  shipment  and  that  it  should 
not  be  the  means  of  furnishing  a  credit  for 
any  other  purpose. 

Where  a  draft  is  drawn  against  the  ship- 
ment of  goods  in  a  transaction  involving 
their  sale,  the  draft  may  be  drawn  and  ac- 
cepted for  the  purpose  of  financing  not 
merely  the  shipment  but  also  the  sale  of  the 
goods.  In  this  connection,  it  has  been  held 
that  a  draft  drawn  against  goods  shipped 
from  a  corporation  to  its  agent  may  be 
accepted  by  a  member  bank  even  though  no 
actual  sale  is  involved. 

Guarantee  as  to  Exportation 

A  member  bank  cannot  accept  drafts  drawn 
by  an  exporter  in  a  foreign  country  to  provide 
funds  for  the  purchase  of  farm  products  from 
farmers  in  such  country  unless  the  foreign 
exporter  has  a  contract  to  ship  the  com- 
modities in  question  to  some  other  country. 
Unless  the  member  bank  has  a  guarantee  to 
this  effect,  the  transaction  is  not  one  involv- 

[421 


i- 


ing  importation  or  exportation  of  goods,  and 
the  fact  that  the  foreign  exporter  intends  a 
sale  of  the  goods  in  a  foreign  country  is  not 
sufficient.  An  actual  contract  of  sale  must 
exist  and  it  must  appear  that  the  drafts  are 
merely  drawn  in  advance  of  the  actual  ship- 
ment of  goods  under  the  contract  of  sale. 

Acceptances  Financing  Future  Importations 

A  member  bank  may  accept  drafts  drawn 
for  the  purpose  of  importing  goods,  whether 
or  not  the  sale  under  consideration  has  been 
consummated  at  the  time  of  the  acceptance, 
but  the  accepting  bank  must  be  reasonably 
sure  that  the  draft  is  drawn  to  finance  a  trans- 
action involving  importation  or  exportation 
of  goods,  that  its  proceeds  will  be  used  for 
that  purpose  and  that  there  is  a  definite  bona 
fide  contract  for  shipment  within  a  reason- 
able and  specified  time.  If  the  accepting 
bank  believes  that  the  proceeds  will  ulti- 
mately be  used  solely  for  the  purpose  of 
financing  the  transaction  involving  the  im- 
portation of  goods,  it  is  immaterial  whether 
or  not  the  goods  have  been  actually  sold  at 
the  time  of  the  acceptance,  and  it  is  not  even 

[43] 


necessary  that  the  goods  be  identified  at  that 

time. 

If  the  credit  is  granted  before  the  importa- 
tion takes  place,  the  acceptance  may  be  con- 
tinued or  renewed  with  propriety,  while  the 
goods  are  on  the  docks. 

Drafts  of  Persons  Doing  Both 
Export  and  Import  Business 

Where  a  dealer  engaged  in  the  purchase  of 
the  same  character  and  class  of  goods  for 
export  and  domestic  use,  desires  to  finance 
the  purchase  and  sale  of  goods  to  be  exported, 
his  agreement  with  a  member  bank  accepting 
drafts  should  show  that  he  has  a  contract 
for  the  exportation  of  the  goods,  that  the 
total  amount  of  drafts  drawn  under  such 
credit  will  not  exceed  the  aggregate  amount 
involved  in  the  export  contract,  that  the  pro- 
ceeds of  the  drafts  are  to  be  used  in  connec- 
tion with  the  export  transaction,  and  that 
the  proceeds  of  the  sale  of  the  goods  exported 
will  be  applied  to  pay  acceptances,  unless 
the  dealer  has  meanwhile  provided  the  bank 
with  funds  to  meet  such  acceptances  at 
maturity,  or  has  properly  secured  them. 

[44] 


Option  of  Dealers  to  Secure  Drafts 

A  dealer  having  drawn  drafts  accepted  by 
a  member  bank  in  an  export  transaction, 
should,  with  the  consent  of  the  accepting 
bank,  be  given  the  option  to  secure  such 
drafts  in  the  manner  required  of  bills  drawn 
in  domestic  transactions,  if  he  desires  to  use 
the  proceeds  derived  from  the  sale  of  the 
goods  exported  for  purposes  other  than  the 
payment  of  such  drafts. 

Renewals  Based  on  Import  or 
Export  of  Goods 

An  accepting  bank,  upon  payment  of  an 
acceptance,  may  for  a  reasonable  period, 
accept  new  drafts  for  the  financing  of  the 
original  transaction  even  after  shipment  and 
delivery  of  the  goods,  if  such  renewals  are 
stipulated  in  the  original  contract  as  an  in- 
cidental condition  of  the  transaction  of  im- 
portation or  exportation  upon  which  the 
acceptance  is  based. 

Miscarriage  of  Export  Transaction 

If  fully  secured,  a  member  bank  may  accept 
drafts  drawn  by  a  domestic  firm,  having  a 
contract  to  sell  to  foreign  buyers,  when  the 

[45] 


transaction  is  made  in  good  faith,  though 
resulting  in  the  ultimate  sale  of  the  goods 
to  an  American  instead  of  to  a  foreign 
purchaser. 

Attached  Documents  in 
Domestic  Transactions 

The  provision  which  authorizes  member 
banks  to  accept  drafts  based  on  domestic 
shipment  of  goods  when  shipping  documents 
are  "attached,"  does  not  mean  that  the 
documents  must  be  physically  fastened  to 
the  draft.  Shipping  documents  must,  how- 
ever, be  made  out  or  endorsed  so  as  to 
convey  or  secure  title  to  the  accepting  bank. 

Purchase  hy  Member  Bank  of 
Its  Own  Acceptances 

In  the  past  banks  were  accustomed  to  buy 
many  of  their  own  acceptances  because  it  was 
necessary  in  order  to  develop  the  acceptance 
market.  While  it  is  undesirable  in  the  opm- 
ion  of  the  Federal  Reserve  Board  for  a  bank 
to  buy  its  own  acceptances,  it  is  essential 
that  the  credit  of  the  accepting  bank  >e 
protected,  through  such  purchase,  where  the 
market  conditions  prevent  absorption. 

[46] 


Purchase  by  a  bank  of  its  own  acceptances 
is  equivalent  to  a  loan  or  advance  to  the  cus- 
tomer for  whom  the  acceptance  is  made,  and 
the  liability  of  the  customer  is  subject  to  the 
limitations  placed  on  loans.  The  power  of 
a  member  bank  to  accept  drafts  is  entirely 
distinct  from  the  power  to  discount  accept- 
ances of  others. 

Dollar  Exchange 

In  order  that  a  draft  drawn  by  a  foreign 
bank  on  a  member  bank  for  the  purpose  of 
furnishing  dollar  exchange  may  be  accepted 
by  the  latter,  the  drawer  must  be  in  a 
foreign  country  or  dependency  or  insular 
possession  of  the  United  States  where  the 
usages  of  trade  have  been  determined  by  the 
Federal  Reserve  Board  to  require  the  drawing 
of  this  character  of  paper.  Application  must 
first  be  made  to  the  Board  setting  forth  the 
usages  of  trade  in  the  place  where  the  drawer 
bank  is  located.  If  the  board  deems  the 
granting  of  the  application  expedient,  it  will 
notify  the  member  bank  of  its  approval  which, 
however,  may  be  revoked  upon  ninety  days 
notice  to  the  member  bank. 

[47] 


M 


'I 


Eligibility 

A  bill  or  acceptance  is  said  to  be  "eligible" 
when  it  may  be  purchased  or  discounted 
by  a  Federal  Reserve  bank.  In  order  to  be 
eligible,  it  must  conform  to  all  the  require- 
ments of  the  Federal  Reserve  Board,  smce 
otherwise  it  cannot  be  purchased  or  dis- 
counted by  Federal  Reserve  banks  and  will 
thereby  Jose  one  of  its  greatest  assets. 

Discount  by  Federal  Reserve  Bank 

A  Federal  Reserve  bank  may  discount 
for  any  of  its  member  banks  any  note,  draft 
or  bill  of  exchange  provided  it  has  the  follow- 
ing requisites : 

1.  It  must  have  a  maturity  at  the  time  of  discount  of 
not  more  than  ninety  days,  excluding  days  of  grace, 
but  where  drawn  for  agricultural  purposes*  it  may 
have  a  maturity  of  not  more  than  six  months. 

2.  It  must  have  arisen  out  of  actual  commercial  trans- 
actions, namely,  it  must  be  an  instrument  drawn 
for  agricultural,  industrial,  or  commercial  purposes, 
or  the  proceeds  of  which  have  been  or  are  to  be 
used  for  such  purposes. 

S.  It  must  not  have  been  issued  to  carry  or  trade  in 

*See  definiUon  of  "AgrioutaiMl  P«per"  on  puge  52. 

[48] 


stocks,  bonds,  or  other  investment  securities,  ex- 
cept bonds  and  notes  of  the  United  States. 

4.  The  aggregate  of  negotiable  paper  bearing  the  signa- 
ture or  indorsement  of  any  one  borrower,  whether 
person,  firm,  company  or  corporation,  rediscounted 
for  any  one  member  bank  must  not  exceed  at  any 
time,  ten  per  centum  of  the  unimpaired  capital  and 
surplus  of  such  bank,  this  restriction,  however,  not 
applying  to  the  discount  of  bills  of  exchange  drawn 
in  good  faith  against  actually  existing  values. 

5.  It  must  be  indorsed  by  a  member  bank. 

6.  It  must  conform  to  all  regulations  of  the  Federal 
Reserve  Board. 

General  Character  of 
Eligible  Instruments 

The  Federal  Reserve  Board  has  determined 
that  the  instrument  itself  to  be  eligible  for 
rediscount  at  a  Federal  Reserve  bank  must 
meet  the  following  requirements : 

1.  It  must  be  an  instrument  whose  proceeds  have  been 
used  or  are  to  be  used  in  producing,  purchasing, 
carrying,  or  marketing  goods  in  one  or  more  of  the 
steps  of  the  process  of  production,  manufacture,  or 
distribution. 

2.  It  must  not  have  been  used  nor  contemplate  use 
for  permanent  or  fixed  investments  of  any  kind, 
such  as  lands,  buildings,  or  machinery. 

[49] 


;'^t 


3.  Its  proceeds  must  not  have  been  used  nor  contem- 
plate use  for  investments  of  a  purely  speculative 
character. 

4.  It  may  be  secured  by  the  pledge  of  goods  or  col- 
lateral, if  it  is  otherwise  eligible. 

Applications  for  Rediscount 

A  member  bank  must  make  application  for 
rediscoimt  to  the  Federal  Reserve  bank,  which 
will  satisfy  itself  as  to  the  eligibility  of  the 
instrument.  Member  banks  must  furnish 
with  all  applications  for  the  rediscount  of 
notes,  drafts  or  bills  of  exchange,  a  certificate 
in  form  prescribed  by  the  Federal  Reserve 
bank  that  to  the  best  of  their  knowledge 
and  belief,  the  instrument  has  not  been  is- 
sued for  prohibited  purposes. 

Syndicate  Paper 

Where  syndicates  are  formed  for  the  pur- 
pose of  granting  acceptance  credits  for  more 
than  moderate  amounts.  Federal  Reserve 
banks  should  be  consulted  with  regard  to  the 
transaction  and  will  then  decide  the  question 
of  eligibility,  both  as  to  the  character  and 
amount  of  the  bill,  subject  to  the  approval 
of  the  Federal  Reserve  Board. 

[501 


Use  for  CommercM  or  Industrial  Purposes 
Where  the  proceeds  of  paper  have  been  or 
are  to  be  used  to  purchase  coal  or  to  provide 
funds  for  payment  of  other  expenses  of 
operation,  if  the  paper  is  otherwise  in  con- 
formity with  the  law,  and  the  regulations  of 
the  Board,  it  is  eligible  for  rediscount  at 
Federal  Reserve  banks.  If  doubt  exists 
whether  the  proceeds  are  to  be  used  for  com- 
mercial or  industrial  purposes  or  whether  for 
permanent  or  fixed  investments,  then  the 
Federal  Reserve  bank  may  accept  a  statement 
of  the  borrower  showing  a  reasonable  excess 
of  quick  assets  over  current  liabihties  to 
evidence  the  fact  that  it  is  not  drawn  to 
make  a  fixed  investment. 

Bills  Drawn  Against  Actually 
Existing  Values 

A  bill  of  exchange  discounted  before  ac- 
ceptance may  be  said  to  be  drawn  against 
actually  existing  value  only  when  accom- 
panied by  shipping  documents,  or  warehouse 
receipts,  or  other  papers  securing  title  to  the 
goods  sold.  An  accepted  bill  of  exchange 
unaccompanied  by  shippmg  documents  or 

[51] 


other  such  papers  may  be  considered  as 
drawn  against  actually  existing  value  if 
drawn  against  the  drawee  at  the  time  of, 
or  within  a  reasonable  time  after  the  ship- 
ment or  delivery  of  the  goods.  In  the  latter 
case,  there  must  be  reasonable  grounds  for 
belief  that  the  goods  are  actually  in  existence  in 
the  hands  of  the  drawee  in  their  original  form, 
or  in  the  shape  of  the  proceeds  of  their  sale. 


Agricultural  Paper 

Six  months'  agricultural  paper  has  been 
declared  eligible  for  rediscount  at  a  Federal 
Reserve  bank  if  it  conforms  to  the  regulations 
which  would  apply  if  its  maturity  were  ninety 
days  or  less,  instead  of  six  months.  The 
term  "six  months'  agricultural  paper''  has 
reference  to  a  note,  draft,  bill  of  exchange  or 
trade  acceptance  drawn  or  issued  for  agri- 
cultural purposes,  or  based  on  the  sale  of 
live  stock.  It  is  an  instrument  whose  pro- 
ceeds have  been  used  or  contemplate  use  for 
agricultural  purposes,  including  the  breeding, 
raising,  fattening  or  marketing  of  live  stock, 
and  which  has  a  maturity  at  the  time  of 
discount  of  not  more  than  six  months,  ex- 
clusive of  days  of  grace. 

[52] 


Commodity  Paper 

The  term  ''commodity  paper"  refers  to 
notes,  drafts  or  bills  of  exchange,  which  are 
accompanied  and  secured  by  shipping  docu- 
ments or  warehouse,  terminal  or  other  re- 
ceipts covering  approved,  readily  marketable, 
non-perishable  staples,   which   are  properly 
insured.     To  be  eligible  for  rediscount  at  the 
special  rate  established  for  commodity  paper, 
the  instrument  must  comply  with  regulations 
applicable  to  it  and  conform  to  all  the  re- 
quirements  of   the   Federal   Reserve   bank, 
especially  those  relating  to  shipping  docu- 
ments, receipts  and  insurance,  and  must  be 
an  instrument  on  which  the  rate  of  interest 
or  the  discount  charged  the  maker,  including 
the   commission,    does   not   exceed   six   per 
centum  per  annum.     The  special  rate  on  this 
paper  is  intended  to  aid  producers  during 
crop    moving    periods,    and    not    to    assist 
speculators.     Hence,    the    Federal    Reserve 
Board  may  suspend  the  special  rates  when- 
ever it  is  apparent  that  the  movement  of  the 
crops  which   is  intended  to  be  facilitated, 
has  been  practically  completed. 

[53] 


;: '  ..  I 
■t 


Discount  of  Bankers'  Acceptances 

A  Federal  Reserve  bank  may  discount  for 
any  member  bank,  bankers'  acceptances  hav- 
ing a  maturity  at  the  time  of  discount  of 
not  more  than  three  months'  sight,  exclusive 
of  days  of  grace,  which  are  indorsed  by  at 
least  one  member  bank,  and  which  grow  out 
of  transactions  involving  the  importation  or 
exportation  of  goods,  or  which  grow  out  of 
transactions  involving  the  domestic  ship- 
ment of  goods,  where  shipping  documents  are 
attached  at  the  time  of  acceptance;  or,  which 
are  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  document 
conveying  or  securing  title  covering  readily 
marketable  staples.  Federal  Reserve  banks 
may  likewise  acquire  drafts  or  bills  of  ex- 
change drawn  on  member  banks  by  banks  and 
bankers  in  foreign  countries  or  dependencies 
or  insular  possessions  of  the  United  States 
for  the  purpose  of  furnishing  dollar  exchange. 

Eligibility  of  Banker^ s  Acceptances 

A  banker's  acceptance,  which  has  been 
defined  elsewhere,  in  order  to  be  eligible  for 
rediscount  must  have  been  drawn  under  a 

[54] 


credit  opened  for  the  purpose  of  conducting 
or  settling  accounts  resulting  from  trans- 
actions involving: 

1.  The  shipment  of  goods  between  the  United  States 
and  a  foreign  country,  or  between  the  United  States 
and  any  of  its  dependencies  or  insular  possessions, 
or  between  foreign  countries,  or 

2.  The  domestic  shipment  of  goods,  where  shipping 
documents  are  attached  at  the  time  of  acceptance, 
or 

3.  It  must  be  a  bill  secured  at  the  time  of  acceptance 
'  by  warehouse  receipt  or  other  such  document  con- 
veying or  securing  title  covermg  readily  marketable 
staples. 

A  Federal  Reserve  bank  may  acquire  bills 
drawn  to  furnish  dollar  exchange  which  have 
been  accepted  by  a  member  bank  in  accord- 
ance with  the  regulations  relating  to  accept- 
ances by  member  banks,  and  these  bills  may 
be  acquired  prior  to  acceptance  where  in- 
dorsed by  a  member  bank. 

Evidence  as  to  Eligibility 

Federal  Reserve  banks  must  be  satisfied 
from  the  acceptance  itself  or  otherwise  that 
it  is  eligible  for  rediscount.  The  evidence  of 
eligibility  may  consist  of  a  stamp  or  certifi- 
cate affixed  by  the  acceptor  in  a  form  satis- 

[55] 


factory  to  the  Federal  Reserve  bank,  but  no 
evidence^is  required  where  a  bill  is  accepted 
by  a  national  bank. 

Acceptance  Pledged  as  Collateral  Security 
Where  an  acceptance  house  purchases  an 
acceptance  based  on  the  importation  or  ex- 
portation of  goods  and  desires  to  reimburse 
itself  by  drawing  a  bill  upon  a  national  bank, 
the  acceptance,  which  was  based  upon  the 
transaction  involving  the  importation  or 
exportation  of  goods,  being  pledged  as  col- 
lateral security  for  the  bill,  the  new  bill 
cannot  be  said  to  grow  out  of  the  original 
export  transaction  in  the  sense  contem- 
plated in  the  Federal  Reserve  Act.  Hence,  a 
national  bank  cannot  accept  a  draft  drawn 
under  these  circumstances,  since  it  is  not  an 
acceptance  growing  out  of  a  transaction 
involving  the  importation  or  exportation  of 
goods,  and  because  it  is  not  an  acceptance 
of  that  class  authorized  by  the  amendment  of 
September  7,  1916.  It  is  not  drawn  by  a 
bank  or  banker  located  in  a  foreign  country 
and  does  not  grow  out  of  a  transaction  involv- 
ing the  domestic  shipment  or  storage  of 
goods. 

[56] 


Readily  Marketable  Goods 

If  a  new  transaction  is  entered  into  after 
importation  has  been  completed,  it  would 
constitute  a  domestic  transaction,  in  which 
case  it  must  be  decided  whether  or  not  the 
goods  are  to  be  considered  "readily  market- 
able.'' If  they  are,  the  acceptor  must  be 
seciu-ed  by  warehouse  receipts  or  other 
documents. 

It  has  been  held  that  cattle  are  a  readily 
marketable  commodity,  and  a  banker's  ac- 
ceptance secured  by  a  chattel  mortgage  there- 
on may  be  rediscounted  at  a  Federal  Reserve 
bank.  Potatoes  properly  graded,  packed  and 
stored  in  a  responsible  and  weather-proof 
warehouse  constitute  a  readily  marketable, 
non-perishable  staple  within  the  meaning  of 
the  regulations. 

Bona  Fide  Sale  Necessary 

Where  a  transaction  against  which  a  draft 
is  drawn,  involves  a  direct  sale  to  a  foreign 
purchaser,  the  fact  that  it  may  be  consum- 
mated before  the  exportation  actually  com- 
mences is  immaterial,  if  the  transaction  is 
bona  fide  and  the  accepting  bank  has  no 

[57] 


reason  to  believe  that  the  purchaser  will 
divert  the  goods  from  their  foreign  destination. 

Trust  and  Warehouse  Receipts  as  Security 
When  an  acceptance  is  secured  by  shipping 
documents  which  are  surrendered  by  the 
acceptor  for  a  trust  receipt,  which  permits 
the  purchaser  to  retain  control  of  the  goods, 
the  accepting  bank  is  not  seciu-ed  "by  some 
other  actual  security."  A  trust  receipt, 
however,  which  does  not  permit  the  pur- 
chaser to  procure  control  of  the  goods  may 
be  said  to  be  actual  security  within  the  mean- 
ing of  the  act. 

Warehouse  receipts  on  other  goods  may  be 
substituted  by  a  mill  for  cotton  receipts 
during  the  life  of  the  acceptance,  but  Federal 
Reserve  banks  should  make  sure  that  the 
receipt  belonging  to  the  mill  receiving  the 
credit  is  issued  by  a  warehouse  which  is 
independent  of  the  borrower. 

Discount  of  Renewals 

First  acceptances  which  have  matured  may 
be  renewed  by  member  banks  provided  the 
original  contract  so  specifies,  and  Federal 
Reserve  banks  may  discount  such  renewed 

[58] 


acceptances,  although  they  may  not  engage 
in  advance  to  make  such  discount  of  a  re- 
newal. 

A  bank  may  resell  or  reissue  its  own  ac- 
ceptances and  they  may  be  treated  as  accept- 
ances outstanding  and  not  as  loans.  This 
applies  to  those  sold  or  discounted  with  the 
Federal  Reserve  bank,  and  also  to  accept- 
ances sold  in  the  open  market. 

Purchase  of  Acceptances  by 
Federal  Reserve  Banks 

Federal  Reserve  banks  may  purchase  and 
sell  in  the  open  market,  bills  of  exchange  and 
bankers'  acceptances  of  the  kinds  made 
eligible  for  rediscount  with  or  without  in- 
dorsement of  a  member  bank. 

General  Character  of  Eligible  Instruments 
The  Federal  Reserve  Board  has  ruled  that 
to  be  eligible  for  such  purchase,  the  bill  or 
acceptance : 

1.  Must  not  have  been  issued  to  carry  or  trade  in 
stocks,  bonds  or  other  investment  securities,  except 
bonds  and  notes  of  the  United  States  Government. 

2.  Must  not  be  a  bill  whose  proceeds  have  been  used 
or  contemplate  use  for  permanent  or  fixed  invest- 

[59] 


t 


ments  of  any  kind,  such  as  land,  buildings,  or  ma- 
chinery, or  for  investments  of  a  purely  speculative 
character. 

3.  Must  have  been  accepted  by  the  drawee  prior  to 
purchase  by  the  Federal  Reserve  bank,  unless  ac- 
companied and  secured  by  shipping  documents  or 
by  a  warehouse,  terminal,  or  other  similar  receipt, 
conveying  security  title. 

4.  May  be  secured  by  the  pledge  of  goods  or  collateral, 
if  otherwise  eligible. 

Evidence  as  to  Eligibility 

Federal  Reserve  banks  must  satisfy  them- 
selves that  the  bill  offered  for  purchase  has 
all  the  requirements  of  eligibility.  This  evi- 
dence usually  appears  on  the  face  of  the  bill, 
which  bears  a  stamp  or  certificate  affixed  by  the 
drawer  or  acceptor  showing  it  to  be  a  trade 
acceptance. 

Bills  of  Exchange  and  Trade  Acceptances 

The  above  are  general  requisites  applicable 
to  all  acceptances.  In  the  case  of  trade 
acceptances,  in  addition  to  the  conditions 
prescribed  in  the  definition  of  eligibility,  the 
bill  must  have  arisen  from  an  actual  com- 
mercial transaction,  and  must  have  a  matur- 
ity of  not  more  than  ninety  days,  excluding 

[60] 


days  of  grace.  It  must  carry  also  the  in- 
dorsement of  a  member  bank  or  else  a 
satisfactory  statement  must  be  supplied  as 
to  the  financial  status  of  at  least  one  of  the 
parties  to  the  bill. 

Acceptances  of  Non-Member 
Trust  Companies 

Bills  drawn  on  and  accepted  by  a  trust 
company  not  a  member  of  the  Federal 
Reserve  System,  where  the  proceeds  are  to 
be  used  for  purchasing  raw  material  or  in 
the  payment  of  labor,  where  the  goods  have 
not  been  sold  and  no  warehouse  receipt  or 
other  instrument  can  be  furnished,  are  in- 
eligible for  purchase  by  a  Federal  Reserve 
bank. 

Purchase  of  Bankers^  Acceptances 
by  Federal  Reserve  Banks 

The  Federal  Reserve  Board  regulations 
prescribe  that  in  order  for  a  banker's  accept- 
ance to  be  eli^ble  for  purchase,  the  bill  must 
have  a  maturity  at  the  time  of  purchase  of 
not  more  than  three  months,  exclusive  of  days 
of  grace,  and  must  have  been  drawn  under  a 

[61] 


credit  opened  for  the  purpose  of  conducting, 
or  settling  accounts  resulting  from  a  trans- 
action or  transactions  involving — 

1.  The  shipment  of  goods  between  the  United  S totes 
and  any  foreign  country,  or  between  the  United 
Stotes  and  any  of  its  dependencies  or  insular  pos- 
sessions, or  between  foreign  countries;  or 

C  The  shipment  of  goods  within  the  United  States, 
provided  the  bill  at  the  time  of  its  acceptance  is 
accompanied  by  shipping  documents;  or 

S.  The  storage  within  the  United  Stotes  of  readily 
marketoble  goods  provided  the  acceptor  of  the  bill 
is  secured  by  warehouse,  terminal  or  similar  receipt; 
or 

4.  The  storage  within  the  United  Stotes  of  goods  which 
havfj  been  actually  sold,  provided  the  acceptor 
of  the  bill  is  secured  by  the  pledge  of  such  goods;  or 

tf .  It  must  be  a  bill  drawn  by  a  bank  or  banker  in  a 
foreign  country  or  dependency,  or  insular  possession 
of  the  United  Stotes  for  the  purpose  of  furnishing 
dollar  exchange. 

In  the  latter  case  the  country,  dependency 
or  possession  where  the  foreign  banker  resides, 
must  have  been  one  whose  usages  of  trade 
have  been  determined  by  the  Federal  Reserve 
Board  to  require  the  drawing  of  such  bills. 

[621 


Statements 

Federal  Reserve  banks  may  purchase  or 
sell  in  the  open  market,  with  or  without  in- 
dorsement by  a  member  bank,  drafts  having 
not  more  than  three  months*  sight  to  run, 
whether  accepted  by  member  banks,  or  by 
non-member  banks,  trust  companies,  or  pri- 
vate bankers,  but  before  bills  not  accepted  or 
indorsed  by  member  banks  are  eligible  for 
purchase  by  Federal  Reserve  banks,  the 
acceptor  must  present  a  satisfactory  state- 
ment of  his  financial  condition  to  the  Federal 
Reserve  bank  and  must  agree  in  writing  to 
furnish  the  Federal  Reserve  Board,  upon 
request,  with  any  information  regarding  the 
transaction  which  underlies  the  acceptance. 


[631 


f 


i 


ii« 


III 


111 


■i? 


Acceptances  Under  the  Laws 
of  New  York 

iVetc;  York  State  Banking  Law 

The  New  York  State  Banking  Law  permits 
greater  latitude  than  does  the  Federal  Re- 
serve Act,  In  New  York,  state  banks  and 
trust  companies  may  issue  acceptances  with- 
out security  and  without  reference  to  the 
exportation  and  importation  of  goods. 

Section  185,  subdivision  10,  of  the  New 
York  State  Banking  Law  relating  to  trust 
companies,  and  Section  106,  subdivision  2 
of  the  New  York  State  Banking  Law  relating 
to  state  banks,  permit  them 

"To  accept  for  payment  at  a  future  date  drafts 
drawn  upon  it  by  its  customers,  and  to  issue  letters  of 
credit  authorizing  the  holders  thereof  to  draw  drafts 
upon  it  or  its  correspondents,  at  sight  or  on  time, 
not  exceeding  one  year." 

Section  108  of  the  New  York  State  Banking 
Law,  relating  to  banks,  and  Section  190,  relat- 
ing to  trust  companies,  limit  the  liabilities  re- 
sulting from  extensions  of  credit  by  means 
of  letters  of  credit,  acceptance  of  drafts, 
or  discount  or  purchase  of  notes  or  bills  of 
exchange,  or  other  obligations   of  any  indi- 

[64] 


ill 


■n 


jL 


vidual,  partnership,  unincorporated  associa- 
tion, corporation  or  body  politic  to  ten  per 
centum  of  the  capital  stock  and  surplus  of 
such  bank  or  trust  company.  These  restric- 
tions do  not  apply  to  loans  to,  or  investments 
in  the  interest-bearing  obligations  of  theUnited 
States,  the  State  of  New  York  or  any  city, 
county,  town  or  village  of  such  State. 

Institutions  in  Boroughs  with 
Population  of  Two  Millions 

Where  the  bank  or  trust  company  is  located 
in  a  borough  having  a  population  of  two  mil- 
lions or  over,  its  loans  to  any  state,  other  than 
the  State  of  New  York,  or  to  any  foreign 
nation,  or  municipal  or  railroad  corporation, 
subject  to  the  jurisdiction  of  a  public  service 
commission  of  New  York  State,  may  equal 
but  not  exceed  twenty-five  per  centum  of  the 
capital  and  surplus  of  the  lending  institution. 

It  may,  likewise,  lend  to  any  individual, 
partnership,  unincorporated  association,  or 
to  any  other  corporation  or  body  politic 
amounts  not  exceeding  twenty-five  per  cen- 
tum of  its  capital  and  surplus,  but  the  liabili- 

[65] 


ties  or  loans  in  such  case  must  be  upon  drafts 
or  bills  of  exchange,  drawn  in  good  faith 
against  actually  existing  values,  or  upon  com- 
mercial or  business  paper  actually  owned  by 
the  person  negotiating  same  to  the  lending 
institution,  and  be  indorsed  by  such  person 
without  limitation;  otherwise  such  liabilities 
in  excess  of  ten  per  centum  of  the  capital  and 
surplus  and  not  in  excess  of  an  additional 
fifteen  per  centum,  must  be  secured  by  col- 
lateral having  an  ascertained  market  value 
of  at  least  fifteen  per  centum  more  than  the 
amount  of  liabilities  secured. 

Other  Institutions 

If  the  bank  or  trust  company  is  located  else- 
where in  the  State,  its  loans  to  any  state,  other 
than  the  State  of  New  York,  or  to  any  foreign 
nation  or  a  municipal  or  railroad  corporation  or 
corporation  subject  to  the  jurisdiction  of  a 
public  service  commission  of  New  York  State 
may  equal  but  not  exceed  forty  per  centum 
of  the  capital  and  surplus  of  such  institution. 
The  total  liabilities  to  such  institution  of 
any  individual,  partnership,  unincorporated 

[66] 


f 


association,  or  of  any  other  corporation  or 
body  politic  may  equal  but  not  exceed  forty 
per  centum  of  the  capital  and  surplus  of  such 
institution,  but  the  liabilities  or  loans  in  such 
case  must  be  upon  drafts  or  bills  of  exchange 
drawn  in  good  faith  against  actually  existing 
values,  or  upon  commercial  or  business  paper 
actually  owned  by  the  person  negotiating  the 
same  to  the  lending  institution,  and  be  en- 
dorsed by  such  person  without  limitation; 
otherwise  such  Uabilities  in  excess  of  ten  per 
centum  of  the  capital  and  surplus  and  not  in 
excess  of  an  additional  thirty  per  centum, 
must  be  secured  by  collateral  having  an  accer- 
tained  market  value  of  at  least  fifteen  per 
centum  more  than  the  amount  of  liabilities 
secured. 

In  computing  the  total  loans  to  an  individ- 
ual, all  loans  to  any  partnership  or  unincor- 
porated association  of  which  he  is  a  member, 
made  for  his  benefit  or  for  that  of  his  firm, 
shall  be  included.  Loans  to  a  partnership  or 
unincorporated  association  shall  include  all 
those  made  for  its  benefit  as  well  as  for  the 
individual  members,  and  in  loans  to  a  cor- 

[67] 


-v 


I 


II 


poration  there  shall  be  included  all  those 
made  for  the  benefit  of  the  corporation. 

Savings  Banks  in  New  York 

By  virtue  of  an  amendment  to  the  New 
York  banking  laws  which  was  signed  by  the 
Governor,  on  April  19,  1918,  the  deposits  and 
guaranty  fund  and  the  income  derived  there- 
from of  savings  banks  may  be  invested  in 
bankers'  acceptances  and  bills  of  exchange 
of  the  kind  and  maturities  made  eligible  for 
rediscount  with  Federal  Reserve  banks, 
where  the  same  are  accepted  by  a  bank, 
national  banking  association  or  trust  com- 
pany, incorporated  under  the  laws  of  New 
York  State  or  under  those  of  the  United 
States,  and  having  its  principal  place  of 
business  in  the  State  of  New  York. 

Limitations  in  Purchases 

Under  this  amendment,  savings  banks  can- 
not invest  in  such  acceptances  more  than 
twenty  per  centum  of  their  assets,  less  the 
amount  of  the  available  fund  held  pursuant 
to  the  Banking  Laws  for  the  purpose  of 
paying  withdrawals  in  excess  of  receipts  and 

[68] 


/ 


meeting  current  expenses,  or  for  the  purpose 
of  awaiting  a  more  favorable  opportunity 
for  investment. 

The  aggregate  hability  of  any  bank,  national 
banking  association  or  trust  company  to  any 
savings  bank  for  acceptances  held  and  deposits 
made  by  the  latter  is  limited  to  twenty-five 
per  centum  of  the  paid-up  capital  and  sur- 
plus of  such  bank,  national  banking  associa- 
tion or  trust  company. 

Not  more  than  five  per  centum  of  the 
aggregate  amount  credited  to  the  depositors 
of  a  savings  bank  can  be  invested  in  the 
acceptances  of  or  deposited  with  a  bank, 
national  banking  association,  or  trust  com- 
pany of  which  a  trustee  of  such  savings  bank 
is  a  director. 

Market  for  Acceptances 

In  New  York,  where  the  largest  open 
market  for  discounts  has  been  established, 
most  of  the  business  is  a  matter  of  trading. 
One  banker  or  broker  calls  up  another  and 
ofl'ers  or  inquires  for  a  certain  volume  and 

[69] 


w 


kind  of  acceptance;  for  instance,  *' $100,000 
Guaranty  Trust."  In  London  the  method 
of  procedure  is  similar,  but  in  Paris  and  other 
cities,  the  buying  and  seUing  are  done  in  an 
established  exchange  which  fixes  the  discount 
rates. 

Amounts  Most  in  Demand 

On  the  London  market  it  has  been  the  rule 
for  some  years  to  limit  the  amount  of  a  single 
bill  of  exchange  to  £5,000.  The  reason  for 
this  is  that  acceptances  of  £5,000  and  less 
are  more  quickly  negotiable  than  those  of 
larger  denominations.  In  the  New  York 
market — while  the  London  practice  is  being 
followed  to  some  extent — acceptances  in  de- 
nominations of  $10,000  or  less  are  most  in 
demand. 

Beginning  of  the  Market  in  New  York 

The  acceptance  business  in  the  United 
States  had  its  actual  beginning  shortly  after 
the  outbreak  of  the  European  War.  When 
the  London  market  had  to  restrict  its  accept- 
ances, owing  to  the  new  conditions  arising 

[70] 


A 


from  the  war,  the  Guaranty  Trust  Company 
immediately  began  issuing  dollar  letters  of 
credit  payable  in  New  York. 

The  diflSculty  at  that  time  was  the  absence 
of  a  market  for  acceptances.     At  first,  when 
bills  were  offered  from  abroad,  drawn  under 
the  Guaranty  Trust  Company's  dollar  letters 
of  credit,  that  Company  itself  at  first  had  to 
bid  for  them.     Gradually  other  banks  began 
bidding  and  this  action  resulted  in  lowered 
discount   rates.     Later,   rates   dropped   still 
further  until,  at  the  beginning  of  1915,  the 
ruling  rate  was  from  three  per  centum  to 
three  and  one-half  per  centum.     About  the 
same  time,  the  situation  began  to  clear  in 
the  American  money  market.     Bankers  and 
brokers  were  freely  bidding  for  acceptances, 
thus  showing  that  a  discount  market  was 
near  at  hand  and  that  the  only  thing  lacking 
was  the  acceptances.     The  Guaranty  Trust 
Company  suppKed  this  deficiency  with  the 
issuance   of  further   acceptance   credits   for 
account  of  its  customers.     The  market  soon 
indicated  that  it  could  absorb  more,  and  the 
result  was  that  the  discount  rate  fell  to  about 

[71] 


tt 


two  and  one-haK  per  centum.  A  number  of 
brokers  who  saw  the  possibilities  in  this  new 
line  of  business,  advertised  all  over  the  coun- 
try, recommending  the  purchase  of  accept- 
ances- This,  together  with  the  amendments 
to  the  Federal  Reserve  Act  which  have  been 
favorable  to  this  class  of  paper,  has  done 
much  to  develop  the  growth  of  the  accept- 
ance market. 


/ 


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